Wells Fargo (WFC): Strong U.S. Consumer Base Helps Weather the Storm in Energy

Posted on Feb 12 2016 - 12:21pm by Sharpe Trade

When I listen to the conference call of a company, I take some notes. And therefore … I thought that to help out new folks as they navigate conference calls, I would start posting my notes, as I’ve taken them. We have made this a continual feature here at Sharpe Trade with the stocks that we have mentioned in the free Sharpe Income project.

I’ve been a little ‘behind’ during this earnings season, getting caught up on posting the notes of all of the calls.  But we should do so now.  Wells Fargo (WFC) recently reported earnings on January 15th, 2016.  The stocks price has dropped by approximately ~8.37 % since they released earnings.  As I have mentioned previously here on Sharpe Trade, this is a stock that I use in the equities section of my own personal income accounts.  I hold no Wells Fargo (WFC) for valuation accounts.  This is purely a piece, a cog, in my Income accounts …

Wells Fargo (WFC)
1 Hour Chart

wells-fargo-wfc-earnngs-chart-02-12-16

So what’s ‘the low-down’ for this quarter?

You can find my notes on last quarter’s earnings here, and as follows are a few notes from my desk as I listened to this quarters Conference Call and looked over the headline numbers …

Wells Fargo (WFC) – From January 15, 2016

  • $1.01(9) Est. / $1.03 in Actual EPS
  • Net Income of $5.709 Billion, down 1.501 % from last quarter, and exactly even (?) from the same time last year.  Net Profit Margins are at 25.215%, which is slightly down, to near steady for the entire year.  Operating Profit Margins are at 36.907%, which has been about steady for the year.
  • A Debt to Assets of approximately 16.62%, with Financial Leverage of 10.459.
  • Dividend yield is ~2.4339% currently with a dividend payout ratio of 28.784%.
  • Analysts are all over the place.  “Research Team” has a “Reduce” and “Market Edge” has an “Avoid” rating.  S&P Capital IQ has a 4 star or “Mild Buy” rating, along with an “Outperform” rating from Credit Suisse, and a “Buy” rating from “The Street”.  Ford Equity Research and JayWalk Consensus both have a “Hold” rating on the stock.
  • Loans & Investments comprise 32.1% of the companies market cap.  Mortgage Banking stands at 20.7%.   Asset & Wealth Management comes in at 16.5% of the business.  Trading and Investment Banking represent 10.4% of the companies market cap.  Consumer Banking is 8.2%, while Card & Payment Services is at 7.7%, and Insurance and Other business services bring up the remaining 4.5% of the business.
  • Highlighted business metrics, such as $280 billion of debt card purchase volume, $70 Billion of consumer credit card purchase volume and $25 billion of commercial card spend volume in 2015.
  • Generated earnings of $23 billion and earnings per share of $4.15 TTM.  Grew revenue and pretax pre-provision profit. Average loans up $51 billion from a year ago, a 6% increase.  Deposit franchise generated strong customer and balance growth with average deposits up $80 billion or 7% from a year ago.  Grew the number of primary consumer checking customers by 5.6%. Credit net charge-off rate declining to 33 basis points for the year. Did not have any reserve release in the second half of the year, the provision expense increased $1 billion compared with a year ago.
  • Capital levels increased.  Returned more capital to shareholders, WFC’s fifth consecutive year of increased returns. WFC returned $12.6 billion to our shareholders through common stock dividends and net share repurchases in 2015.
  • Turning to the economic environment, while parts of the global economy have continued to experience stress and the markets have reacted negatively in the early weeks of 2016, domestic economic conditions remain generally favorable.  WFC is a U.S. Centric company. Falling energy prices have hurt certain sectors of the U.S. economy, most consumers and many businesses are benefiting from lower power costs which results in more discretionary cash that can be used for other purposes. Auto vehicle sales were the best ever in 2015 and Wells Fargo originated a record number of auto loans during the year. If gas prices continue to remain low, 2016 should be another strong year for the auto market.
  • Housing market also continued steady improvement, with price appreciation of 6% helping homeowners to the consumer real estate portfolio where net charge-offs were down 44% from a year ago.  Inventories of homes for sale remain historically low, providing a tailwind for building activity into 2016. Commercial real estate appreciation has been even stronger than consumer real estate and vacancy rates for nearly all property types continue to decline. For apartments, vacancy rates are at historic lows which should benefit both construction activity and pricing in 2016.
  • Compared with a year ago, WFC continued to have strong loan and deposit growth throughout diversified commercial and consumer businesses.  WFC grew revenue and pretax pre-provision profit. WFC had positive operating leverage as our expenses declined. Credit quality remained strong, with net charge-offs of 36 basis points of average loans and continues to have strong liquidity and capital levels.
  • Core loan portfolio grew by $62.8 billion or 8% from a year ago and was up $15.4 billion from the third quarter. Commercial loans grew $9.3 billion and consumer loans grew $6.1 billion from the third quarter. WFC did not acquire any loan portfolios in the fourth quarter, so the linked quarter growth was all organic.
  • C&I loans were up $28.1 billion or 10% from a year ago. The growth was diversified across WFC wholesale businesses with double-digit growth in commercial real estate, asset-backed finance, corporate banking, equipment finance, structured real estate and government and institutional banking.
  • $1.2 trillion of average deposits in the fourth quarter, up $67 billion or 6% from a year ago. WFC average deposit cost was 8 basis points, down 1 basis point from a year ago and stable with third quarter.
  • Equity gains declined 6% in full year 2015, compared with 2014. And considering the current market conditions in our pipeline, WFC would expect continued declines in 2016.
  • Volatile markets we’ve had so far this year could also impact results in capital markets related businesses, including investment banking and trading and may also affect the asset-based valuations and transaction volumes in our market-driven businesses including retail, brokerage, asset management and trust.
  • Wholesale banking earned $2.1 billion in the fourth quarter, stable from a year ago and up 9% from third quarter.
  • Wealth and investment management earned $595 million in the fourth quarter, up 15% from a year ago and down 2% from third quarter. Growth from a year ago was driven by a positive operating leverage, with expenses down 2% and revenue up 1%.
  • OIL: Total loans in oil and gas portfolio down 6% from a year ago and are now less than 2% of total loans outstanding.   Oil and gas non-accruals were $843 million, up $277 million from third quarter. However, as of year end, over 90% of non-accrual oil and gas loans were current on interest payments.  Continue to work closely with customers and are monitoring market conditions and have reset borrowing base determinations twice since energy prices started to decline in late 2014. However, as mentioned in the past, it takes time for losses to emerge and at current price levels, WFC expects to have a higher oil and gas losses in 2016.  The company considered the challenges within the energy sector in allowance process throughout 2015 and approximately $1.2 billion of the allowance was allocated to oil and gas portfolio. It’s important to note that the entire allowance is available to absorb credit losses inherent in the total loan portfolio. WFC has also considered the impact of lower energy prices on debt and equity securities portfolio and had approximately $130 million of OTTI-related write-downs in our energy-related holdings in the quarter.
  • Questions and Answers:  Matt O’Connor from Deutsche Bank Question: Energy comments, of the 17 Billion, less than 2% of total loan book, how much of that piece are you focused on?  Answer:  Well, the whole thing.  Half of those customers, one half of those balances represent Energy & Petroleum companies, upstream companies.  One quarter represents oilfield services companies, and one quarter of them represent pipelines and storage and other midstream activity.  This excludes larger cap companies where WFC does not view the credit exposure as quite the same. (29:13) – Very balanced loan portfolio, as it is consumer heavy.  Outlook for household remains strong on the consumer real estate side of the portfolio.  Specified that for Oil, it is not that 90% portfolio is current, but 90% of nonperforming oil and gas loans are performing.  All the others are performing.  Models for working their portfolio exposed to energy companies does not assume an upward slope in Oil price, but a flat price in Oil, and as well, is a very individual, customer by customer approach to the portfolio. 

When it comes to banks such as Wells Fargo (WFC),  concern has been expressed with the Energy markets to a concern over the financing of Energy and Petroleum problems.  There was some concern, since Wells Fargo (WFC) has built a U.S.-centric business, and the Energy companies facing problems are from operations in North America.  However, total loans in oil and gas portfolio are less than 2% of total loans outstanding with Wells Fargo (WFC), and 90% of non-performing Energy loans are up to date.  

Their strong consumer base is helping them weather the storm in Oil quite well …

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